M2 and inflation

US M2 money supply has been hitting repeated record highs in 2026, reaching about $23.05 trillion in May 2026 (seasonally adjusted). It has grown steadily month-over-month, with year-over-year growth accelerating to around 5.6% in May 2026 (the fastest since mid-2022), up from lower rates earlier in the recovery. This is likely the reason why inflation is stubbornly high, on top of the oil drama in Hormuz. M2 includes cash, checking deposits, savings deposits, money market funds, and small time deposits. Its growth is largely driven by private bank activity but heavily influenced by Federal Reserve policy. After a period of quantitative tightening (QT) that caused M2 contraction in 2023–early 2024, the Fed shifted toward more accommodative policy. This includes rate cuts (starting in 2025), increased Treasury purchases (effectively new QE-like liquidity), and lower policy rates. These actions inject reserves into the banking system, enabling more lending and deposit creation. Banks create most of the broad money supply through loans and credit. With lower interest rates making borrowing cheaper, commercial bank loans and leases have risen. This directly expands deposits, which is a core part of M2. If that wasn’t enough, Government deficits, Treasury issuance, and overall economic expansion (even if uneven) require and support money growth. The bottom line is that with a 5% annual increase in money supply, you end up having inflation of 4.3%. Inflation is a choice, and we have chosen to have it.

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